Why This Top Contrarian Pick Is Surging Almost 10% Today

Tourmaline Oil Corp. (TSX:TOU) reported significantly higher cash flow amid increasing production and declining costs.

| More on:

There is no shortage of contrarian stocks in the energy space these days. And the best among these is certain natural gas-focused companies that continue to rack in excellent results, despite persistently low natural gas prices.

Natural gas prices have been under pressure over the last many years, and the consensus expectations for these low prices is that they will remain with us for years to come. With production increasing at unprecedented speed in recent history, it does seem that this will be the case.

Certainly, the volatile swings in natural gas prices this summer, with prices hitting negative territory at one point, do nothing to inspire confidence.

But what if things are slowly changing?

Natural gas storage is now below five-year average

A very bullish sign I am focused on right now is the natural gas storage numbers, which have fallen below five-year average levels. This is historically a very bullish sign for the natural gas supply/demand balance and, ultimately, natural gas prices.

Against this backdrop, we have Tourmaline Oil Corp. (TSX:TOU), up almost 10% at the time of writing, which just reported a third-quarter production increase of 40% — a 35% increase in cash flow to $857 million — and an 8% reduction in operating costs.

The company also announced that it will start paying a modest dividend as of January 2018.

Who would have thought that a producer could generate this kind of cash flow in this type of environment?

Well, some can and are doing just that.

Another very interesting natural gas play is Peyto Exploration and Development Corp. (TSX:PEY), which currently yields 7.2% and continues to post outstanding results, with production growth and cost reductions continuing to bring value to the company and its shareholders.

Peyto’s third-quarter results were, once again, strong, with EPS increasing to $0.27 from $0.14 in the same quarter last year. Funds from operations increased 9% to $139 million.

Peyto has recently shifted much of its drilling to horizontal drilling, which brings with it greater efficiencies and a strong production profile going forward.

The cure for low prices…

… is low prices. This old adage holds true for two reasons. First, low prices ensure that companies become more efficient out of necessity; second, eventually, low prices will lead to companies reducing production to curb losses and maximize profits, hence rebalancing the market.

To be sure, timing is everything and very difficult to predict, but both Tourmaline and Peyto have announced that they are scaling back on capital spending and production next year in response to low prices.

And with natural gas demand from utilities and industry strengthening, we have a solid business case here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas does not own shares in any of the companies mentioned in this article.

More on Dividend Stocks

TFSA and coins
Dividend Stocks

TFSA Couples: How to Invest for $777 of Passive Income Each Month

The TFSA or Tax-Free Savings Account can be used to buy and hold a portfolio of blue chip dividend stocks…

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Investing in the Stock Market Could Turn Your $1,000 Into $100,000: Here’s How

The stock market can convert a $1,000 regular investment into $100,000 without making too risky bets. Here’s a simple strategy…

Read more »

Dividend Stocks

1 Cheap Industrial Stock to Buy Now and Never Sell

The e-commerce boom is causing warehouse shortages. This industrial real estate stock is meeting the demand and paying an attractive…

Read more »

Businessperson's Hand Putting Coin In Piggybank
Dividend Stocks

$40,000 in These 4 Stocks = A Tidy Monthly Income

Want to earn $160/month in easy passive income? Check out this simple four-stock portfolio to earn a tidy income stream.

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

Better Buy: Chartwell Stock or Sienna Senior Living?

Both Chartwell and Sienna stock could be good total-return stocks for higher-risk investors. They can provide juicy income along the…

Read more »

Canadian Dollars
Dividend Stocks

Need Passive Income? Lock In $17.10 Every Month With $6,500

This passive-income stock is the perfect choice if you want stellar returns, long-term growth, and passive income during the next…

Read more »

money cash dividends
Dividend Stocks

How I’d Invest $25,000 Today to Reach $1 Million

If I'm aiming for $1 million in the next few years, then these are the first and foremost dividend stocks…

Read more »

Target. Stand out from the crowd
Dividend Stocks

These Tax-Loss Selling Targets Look Like Screaming Deals Today

Tax-loss selling is good for tax planning. However, investors should consider tax-loss selling throughout the year, not only in December.

Read more »